Stocks Almost Always Rise in Q4 of Election Year; What About This Year?

By Avi Salzman

Rules are made to be broken, like this one: elevated unemployment means the incumbent will lose. And this one: if the Washington Redskins lose, the incumbent does too.

Here’s another rule that could be tested in the coming weeks: in the fourth quarter of an election year, stocks tend to rise. In the past 15 election years (since 1950), the S&P 500 has risen 13 times, with a minimum gain of 1%. The two exceptions were during the recession years of 2000 and 2008.

Clearly equities are in trouble today. The S&P 500 is off by 22 points, or 1.5%, as investors approach the fiscal cliff and a government whose divisions can feel irreconcilable. Since the start of the quarter, the S&P 500 is down about 3%. But Canaccord Genuity analyst Tony Dwyer is plenty hopeful. In fact, his year-end target for the S&P 500 is 1,650. Recent consumer data and the Fed’s aggressive actions mean the economy, and thus thee market, have a solid floor.

“Recent data reinforces a sustainable improvement from historically weak levels in (1) consumer sentiment, (2) employment (3) credit availability, and (4) housing. The Fed has made it clear they are willing to take extraordinary steps to insure economic recovery in the U.S., and thus far the economic data supports a growth view. Ultimately, with such monetary accommodation a recession is highly unlikely.”

Miller Tabak strategist Peter Boockvar is not quite on the same page, however.

“Bottom line, the stock market correction is not over, earnings will continue to slow, higher taxes of any kind in 2013 will bring a US recession, central banks will print more money (but can’t prevent a cyclical bear market after the near 3 yr bull run) and 2013 will be the most challenging both economically and from a market perspective that we’ve seen in a few yrs. Stagflation here we come is my call. Buy the flation and sell the stag.”

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.